Standard & Poor’s downgraded Italy’s credit rating outlook to negative, citing a political deadlock that could adversely affect plans to reduce the country’s soaring debt.
The euro fell around 100 points against the dollar to $1.4039 in Asian trade, while against the safe-haven Swiss franc it dropped around 100 points to 1.2345 francs, a record low.
“It’s all about the euro, and the debt problems for governments, which means nobody is interested in adding risk,” said Sue Trinh, senior currency strategist at RBC Capital Markets in Hong Kong. “Greece is facing a refinancing, and possible restructuring, and there are political concerns in Spain – the whole atmosphere is negative.”
On Sunday, Spanish prime minister José Luis Rodríguez Zapatero’s Socialist party suffered its worst defeat in more than 30 years in local elections amid a backlash over austerity measures.
The European Central Bank in recent days hardened its opposition to a Greek debt restructuring, setting itself on a collision course with politicians in Brussels, as it claimed that a move to reconfigure Greek bonds would make them ineligible for central bank liquidity operations.
“The euro moves come on the back of the growing disparity between the ECB and other policy makers,” said RBC Capital Markets strategist Michael Turner, in a note.
Asian stocks fell the most in two months, European markets opened lower and commodities slipped, with crude oil for July delivery falling as much as 1.8% to $98.35 a barrel. The Australian dollar traded lower at $1.0534, against a high in Asia of $1.0649.
Investors in the coming days are likely focus on reports of US growth and euro region PMI, analysts said, as they look for clues on economic growth, and as Europe and the US struggle to emerge from the financial crisis and economic slowdown.